International Portfolio Diversification and the Magnitude of the Market Timer's Penalty

Market timers without timing skill suffer a penalty relative to buy-and-hold investors in the form of higher portfolio risk. With transactions costs, timers suffer lower expected returns as well. We derive the magnitude of this penalty for a timer randomly switching funds between two or more risky assets. Assuming costless trades, a U.S.-based timer randomly switching between U.S. and Japanese national stock funds can expect to face a 26.2% higher standard deviation than a comparable buy-and-hold investor at the same level of expected return. A timer randomly switching between a globally diversified equity portfolio and U.S. T-bills faces a 50.3% higher standard deviation of return than a comparable buy-and-hold investor.